What duties and fee structures should be established in financial advisor agreements?

INTRODUCTION

A financial advisor may be hired for lack of expertise in finance, developing strategic financial future plans, tackling complex transactions, etc. on the part of some other party. A financial advisor is a professional who provides his financial expertise so as to guide the other party in its course of transactions, strategizing for financial management, observing legal financial compliance, etc., and other such financial events. The other party, which is receiving this advice and guidance and which is hiring the financial advisor here, is the client. Such a relationship is formed for performing tasks that involve trust of the client and services of the advisor and therefore gives rise to an agreement that clearly lays down the duty of the parties, scope of services, fees for services, etc., and is called a financial advisor agreement.

WHAT DO BOTH THE PARTIES EXPECT OF EACH OTHER?

The financial advisor seeks in return for providing his service some amount of fees and requires a fair and clear extent of liabilities as well as the client's cooperation. On the other hand, the client seeks proper and diligent services, accountability, and transparency. A dispute preventing agreement can only be made when the above-mentioned requirements of both the parties are specified. Therefore, the following must be observed and established in agreements clearly.

DUTIES OF THE FINANCIAL ADVISOR

Firstly, the scope of services, like making an investment strategy, portfolio management, etc., must be laid down, beyond which any act, if done, would be unauthorized. Then the following must be maintained:

- Duty of Loyalty: the advisor must keep his interest subservient to the interest of the client. This means that if the advisor can gain some commercial benefits through his acts, he should avoid the same and only work in the interest of his client. In such cases there must be disclosure of conflict of interest.

- Duty of Care: this refers to following proper diligence and prudence and maintaining professional skills so as to avoid any deficiency in services. The risk must be avoided or managed.

- Duty of Confidentiality: For any advice to be given, there has to be provided, prior to the same, some key information of the business, its finances, etc. The same cannot be disclosed without any authorization.

- Duty of Monitoring: this means that the advisor has to keep up to date with the market’s condition and the upgrading of technology, as well as with the requirements or changes in the policy of the client, and then prepare proper advice/a plan. This activity cannot be a one-time thing; it has to be followed throughout the duration for which the advisor has been hired.

- Duty of following the client's policy or instructions: any advice/plan cannot be derived or made exceeding the scope/the instructions provided.

DUTIES OF THE CLIENT

- Duty to disclose the information of financial assets and liabilities clearly, as would be appropriate for the financial advisors to make or provide a proper plan.

- Duty to keep the financial advisors up to date with the changes in requirements, major financial policy, and major assets/liabilities as would be appropriate.

- Duty of Making Authorized representation and warranties: as in the legitimacy of the information provided, and representation is to be affirmed by the client.

FEE STRUCTURES

It is very important for the agreement to specify how the advisor would be paid in return apart from the duties themselves. Broadly speaking, the fee structure can be fee-based or fee-only. Fee-only refers to when the advisor is paid solely on the basis of the below-mentioned ways, meaning it comes only for the services provided. On the other hand, a fee-based structure is when, in addition to the fee-only method, some amount/percentage of commission from the transactions entered into from the advice provided, selling of certain shares, etc., is also used for providing fees.

The following are the different fee structures that can be established:

- Assets Under Advice (AUA) fees: for the percentage of assets under the management of the advisor, meaning the percentage of assets upon which the skills/services of the advisor are applied would determine the fees.

- Hourly Fees: this refers to providing fees according to the number of hours clocked in by the advisor to provide his services.

- Retainer Fee: is the payment of fees based on the period/duration for which the advisor is retained for his services.

- Flat Fee: is the predetermined amount to be paid for providing particular services for generally a particular project.

Therefore, any of the above-mentioned structures can be adopted to provide a certain fee to the advisor, but the following things are also to be specified in the agreement, and then only can a proper and transparent fee structure be made.

- The clear amount/rate is to be specified along with the method of calculation of payment.

- Time of payment: it must be mentioned as to when the specified amount or percentage of assets, for example, is to be provided. If required, then a fee schedule should also be made.

- Frequency of payment: this refers to the mentioning of the number of times the payment is to be made or if it is to be made in small parts.

- When is the fees earned or becomes due: In this, it is to be clearly mentioned as to when the fees becomes payable by the client

- It must be clearly specified if the type of remuneration is fee-only or fee-based.

- GST compliance-based terms must also be clearly stated.

CONCLUSION

It can be said that a good agreement can only be made when there exists a clear specification of duties on the sides of both the client and the financial advisor as well. Proper relations of trust and fiduciary duties are a must. Additionally, the method and structure of fee payment must also be laid down.